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Saturday, 02 February 2008

Subprime mortgage lending crisis would you buy bank shares?

The subprime mortgage crisis has brought the United States very close to recession. It was the banks that were the subprime mortgage lenders. In search of a quick buck, the banks sought out clients that would render subprime mortgage rates which were much higher than the prevailing rates.

Would you invest in a bank that poured millions of dollars into worthless investments in pursuit of quick profits? What kind of investment expert buys anything let alone major capital investment without even looking at the underlying value of the investment?

The subprime crisis is simply a result of large investors - including many big names in investment banking - putting money (not theirs, of course) into so-called investments with no inherent value. The promised returns were huge. The money came from here, there and everywhere including pension funds.

Subprime mortgage loans were offered to clients at the sub economic end of the property market. Because these clients were from the lower end of the economic spectrum, the banks were able to charge high rates of interest on these loans. This meant that for the banks the return was high. This high return was a long-term return, seemingly sustainable for years to come.

Huge returns with the only major expense being the mortgage broker's commission. Of course there was never any question of valuing the properties concerned. That would have added costs and slowed down the process. Greed was too great to be able to wait.

When there are no controls and money is advanced on an ad-hoc basis, anything is possible. From the start the amounts advanced far exceeded the inherent property values. With a decline in property values, some bright spark decided to look into the actual value of this highly lucrative investment. The actual value of the investments was minimal, sparking the start of the crisis.

Many people can be taken-in by the promise of huge investment returns. Investment scammers know this and prey on people's greed with promises of huge returns for a small investment.

But the scale of this crisis is mind-boggling! More worrying is the fact that investment into this market came not from the gullible man-in-the-street but from the major investment banks of the world - the investment bankers, the investment experts, people that should have known what they were doing.

Hardly a bank worldwide remains untarnished! The scale of this collective stupidity was enough to put us on the brink of a global recession. Governments have been called upon to bail-out those involved, to give them another chance to invest in another scheme. Taxpayers are now paying the price.

With this knowledge of what happened and why, can you still trust the banks? Would you buy shares in one of these banks? Would you be able to trust their judgement again?

I am not in the market to buy bank shares. If the banks en-masse were able to indulge in such collective stupidity, it casts a serious doubt on their ability to invest in the future. It casts a shadow over the entire financial services industry. Banks have been revealed as greedy and stupid, seeking out easy money and high returns without even valuing the investment.